On January 27, 2020, FERC petitioned the United States Court of Appeals for the Sixth Circuit (“Sixth Circuit”) for rehearing en banc of that court’s split (2-1) decision finding that the bankruptcy court’s concurrent jurisdiction is paramount, and that therefore, FERC-jurisdictional power purchase agreements may be rejected in bankruptcy without FERC review (see December 19, 2019 edition of the WER for a detailed analysis of the majority’s opinion and Judge Richard Allen Griffin’s opinion dissenting in part). This case is important because different courts have come to opposite conclusions over whether a debtor must obtain FERC authorization before it effects rejection in bankruptcy of a FERC-jurisdictional contract. This issue is also pending before the Ninth Circuit in proceedings associated with Pacific Gas & Electric’s ongoing bankruptcy proceeding.

In the rehearing petition, FERC argues that the Sixth Circuit improperly found that its authority over filed rates was inferior to the bankruptcy court’s authority. En banc review is appropriate, FERC says, because the Sixth Circuit’s opinion conflicts with Supreme Court precedent and involves issues of exceptional public importance.

The underlying case began when FirstEnergy Solutions (“FES”) filed for Chapter 11 bankruptcy and then immediately filed an adversary complaint against FERC in the bankruptcy court. In the complaint, FES sought a declaratory judgement that the bankruptcy court’s jurisdiction is superior to FERC’s jurisdiction and sought an injunction to prevent the federal agency from interfering with the bankruptcy court’s rejection of certain power purchase agreements under FERC’s jurisdiction. The bankruptcy court subsequently ruled that it has exclusive and unlimited jurisdiction to decide whether FES could reject the contracts at issue, enjoined FERC from taking further actions on the matter, and held that FES could reject the contracts under the business judgement rule, which allows a debtor to reject any executory contract that is financially burdensome to the debtor’s estate such that it would inhibit the debtor’s Chapter 11 reorganization.

On December 12, 2019, the Sixth Circuit issued an opinion affirming the bankruptcy court’s assertion of jurisdiction over whether FES may reject its power purchase agreements in bankruptcy. The Sixth Circuit, however, rejected the bankruptcy court’s broad injunction that prevented FERC from taking any action on the FES energy contracts at issue. Additionally, the Sixth Circuit rejected the bankruptcy court’s exclusive application of the business judgement rule, concluding that in order to accommodate the concurrent jurisdiction between, and the separate interests of, the Bankruptcy Code and the Federal Power Act (“FPA”), the bankruptcy court must also consider the public interest and ensure that “the equities balance in favor of rejecting the contract” when deciding whether to grant permission to reject a filed energy contract that is otherwise governed by FERC via the FPA.

In FERC’s January 27 petition for rehearing en banc, it stated that the Sixth Circuit’s decision regarding the bankruptcy court’s superior authority vis-á-vis FERC’s was in conflict with Supreme Court precedent. Specifically, FERC argued that, while the bankruptcy court has the authority to grant rejection of contracts, FERC has the sole authority, granted by the FPA, to decide whether to abrogate or modify filed rates. FERC disagreed with the Sixth Circuit’s reasoning that the public necessity of bankruptcy relief is superior to FERC’s responsibilities under the FPA, arguing that the court’s policy judgement has no support in the statutory text of the FPA or any other authority. FERC contended that en banc review is warranted because the Sixth Circuit’s decision would implicate FERC’s ability to fulfill the mandate given to it by Congress under the FPA to regulate interstate electric wholesale rates and ensure that such rates are just and reasonable.

FERC further asserted that, should an en banc rehearing be granted, the Sixth Circuit’s opinion should not be vacated. Rather, according to FERC, its rehearing petition does not challenge the court’s unanimous rejection of the bankruptcy court’s injunction or its unanimous rejection of the bankruptcy court’s improper application of the business judgement rule. FERC argued that these rulings were correct and thus should not be disturbed.

Petitions for rehearing en banc are not often granted. In this case, it is the Federal government which seeks rehearing on the ground that the majority violated recent Supreme Court precedent, and the panel was split on an issue of national and jurisprudential importance. Stay tuned.

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